Chapter 2 - Law of Demand
- Preferences - your wants and their intensities
- Weighing benefits, costs and substitutes - Your willingness to buy a product or
service depends on your ability to pay, comparative benefits and costs, and the
availability of substitutes.
- Demand - consumers’ willingness and ability to pay for a particular product or service
- For any choice, what you are willing to pay or give up depends on
- Cost
- Availability of substitutes
- Smart choices are marginal choices
- Marginal benefit :
- Additional benefit from a choice
- Changing with circumstances
- Explains the diamond / water paradox (diamond = larger marginal
benefit)
- Willingness to pay depends on marginal benefit, not total benefit
- Water is abundant, marginal benefit is low
- Diamonds are scarce, marginal benefit is high
- Law of Demand -
- Quantity demanded - the amount you actually plan to buy at a given price
- Market demand - the sum of demands of all individuals willing and able to
buy a particular product or service
- Law of demand - if the price of a product or service rises, quantity demanded
decreases, other things remaining the same
- Demand curve - shows relationship between price and quantity demanded,
other things remaining the same = downward sloping
- It is the same as the marginal curve
- Quantity demanded changes only with a change in price.
- All other influences on consumer choice change demand.
- Changes in Demand = shifts in the demand curve - right and left
- Increase in demand
increase in consumers’ willingness and ability to pay. Rightward shift of
demand curve.
- Decrease in demand
decrease in consumers’ willingness and ability to pay. Leftward shift of
demand curve.
- Preferences - your wants and their intensities
- Weighing benefits, costs and substitutes - Your willingness to buy a product or
service depends on your ability to pay, comparative benefits and costs, and the
availability of substitutes.
- Demand - consumers’ willingness and ability to pay for a particular product or service
- For any choice, what you are willing to pay or give up depends on
- Cost
- Availability of substitutes
- Smart choices are marginal choices
- Marginal benefit :
- Additional benefit from a choice
- Changing with circumstances
- Explains the diamond / water paradox (diamond = larger marginal
benefit)
- Willingness to pay depends on marginal benefit, not total benefit
- Water is abundant, marginal benefit is low
- Diamonds are scarce, marginal benefit is high
- Law of Demand -
- Quantity demanded - the amount you actually plan to buy at a given price
- Market demand - the sum of demands of all individuals willing and able to
buy a particular product or service
- Law of demand - if the price of a product or service rises, quantity demanded
decreases, other things remaining the same
- Demand curve - shows relationship between price and quantity demanded,
other things remaining the same = downward sloping
- It is the same as the marginal curve
- Quantity demanded changes only with a change in price.
- All other influences on consumer choice change demand.
- Changes in Demand = shifts in the demand curve - right and left
- Increase in demand
increase in consumers’ willingness and ability to pay. Rightward shift of
demand curve.
- Decrease in demand
decrease in consumers’ willingness and ability to pay. Leftward shift of
demand curve.
